ACCA Advanced Taxation (ATX) Practice Exam

When does a close company not incur a tax charge when providing loans to shareholders?

1. If the loan amount exceeds £15,000.

2. If the individual works part-time.

3. If the loan is provided to a director only.

4. If the individual owns less than 5% interest in the company.

The correct answer is: If the individual owns less than 5% interest in the company.

A close company does not incur a tax charge when providing loans to shareholders if the individual owns less than 5% interest in the company. This is because the tax regulations surrounding close companies stipulate that a potential tax charge arises when loans are made to shareholders or certain associates when they have a significant interest in the company. Specifically, individuals who hold a shareholding of 5% or more are considered significant stakeholders, and loans to them attract a tax charge under the relevant provisions. Therefore, if a shareholder owns less than 5% of the company's shares, they are not deemed to have a substantive interest, and loans provided to them do not trigger tax liabilities for the close company. This understanding emphasizes the importance of ownership structure in close companies and the tax implications that arise from the distribution of loans to shareholders based on their ownership interest.